The nature of creating regulation means it tends to be retrospective, outlawing conduct that has already caused harm to its victims. Financial regulators, governments and central banks are all conscious of this, increasing vigilance in order to prevent newer and more harmful behaviour.
With the emergence of new technology and tools to manage financial products, the decision was taken that the FCA should be ahead of the game, anticipating risks while tools, that could potentially end up harmful to consumers, are in development.
Taking its queue from the medical research field, the FCA launched the Regulatory Sandbox in June 2016 as part of Project Innovate, and has so far seen 60 projects go through its doors.
Anna Wallace, head of innovation at the FCA, said the idea of the sandbox was to get in early with services that were trying something new in the market, with a limited test base and safeguards built in.
Ms Wallace said: "We see this as identifying the potential harm before it is widespread and being able to adapt our regulatory approach and give that feedback to a firm at a much earlier stage. The greatest trend has come from the start up community, who want to use the Regulatory Sandbox where they can work together with the regulator and understand how the regulation applies.
"The Regulatory Sandbox allows firms ways of working first before the launch of a service, with safeguards we think are appropriate. When the product goes live, we are not exactly sure how it might play out so we also work with the firm during the testing purely to spot any risks that might happen, and use our insight to see how these risks might be managed."
The way it works is that a firm applies to be part of the next cohort, satisfying requirements in being genuinely innovative and to consumers' benefit. If it is something for which there are already regulatory rules, such as for digital advice, then the more appropriate area will be the FCA's Advice Unit.
According to the FCA's report, Regulatory Sandbox: Lessons learnt, published in October last year, the vast proportion - at least three quarters - of the projects are start-ups, and half are in the area of retail banking. Over the first three cohorts, 207 firms applied to be part of the project, and applications are open for the fourth cohort.
The sandbox involves eight FCA staff members who work directly as part of the 30-strong Project Innovate, while five people work in the advice unit, also part of Project Innovate. Working on a 'hub and spoke' structure, the sandbox staff will put accepted candidates in touch with the right people, developing a bespoke testing programme.
A big part of the project is to put in place safeguards to allow the company to test its tool in a limited way. So, for example, a complex robo-investment tool may only be tested on a limited number of high-net-worth individuals, and technological assistance may be double checked by a human adviser.